TD Securities said the US dollar could keep rising while global risk premia stay high. It kept a bearish view for 2026, but said the dollar can stay supported in the near term by safe-haven demand.
The bank said an “off-ramp” to the war in coming weeks could reduce the safe-haven premium and weaken the dollar. It also pointed to fading US growth exceptionalism and a possible rise in the “Hedge America” trade as further headwinds.
It said FX volatility may rise once growth worries dominate. It added that central bank hawkishness may give temporary support, but a wider risk-off move across equities, positioning and rates could keep the dollar bid.
It described risk-off drivers such as positioning unwinds, equity drawdowns and terms-of-trade shocks as factors that can lift the dollar and pressure high-beta G10 and emerging market currencies. It also said the dollar looks rich versus most currencies in its HFFV model and has not weakened in line with recent relative rates pricing.
It said its aggregate portfolio shifted to a negative trading weight in the dollar after a positioning clean-out and less cheap technical valuations.
We see the US dollar staying firm in the near term as long as this global risk premium remains high. Recent geopolitical jitters and last week’s weak European PMI data, which came in at 48.5, are keeping investors in safe-haven assets. Our underlying bearish view for the dollar later in 2026 holds, but for now, safety is the primary driver.
Expect currency volatility to increase as worries about global growth take center stage. This means we should consider buying options, as the VIX index has already climbed above 19 in recent sessions. High-beta currencies, like the Australian Dollar and emerging market pairs, will likely face the most pressure in this environment.
We are seeing a significant premium priced into the dollar that fundamentals don’t justify, a situation reminiscent of what we observed through parts of 2025. Even as US interest rate expectations have softened relative to Europe’s, with the market now pricing only one more Fed hike this year, the dollar has failed to weaken accordingly. This shows the safe-haven flow is overpowering traditional rate drivers for now.
Given the crowded positioning and stretched valuations, we have adjusted our own portfolio to a negative trading weight on the dollar. The easy gains from being long USD appear to be over, and we are now looking for tactical opportunities to fade dollar strength. This could involve selling USD call options or structuring trades that benefit if the risk premium suddenly unwinds.
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